International Trade & Investment – Focus on Regulationhttps://www.hlregulation.com
Thu, 23 May 2019 23:42:36 +0000en-UShourly1https://wordpress.org/?v=4.9.10A New European Deal?https://www.hlregulation.com/2019/02/06/a-new-european-deal/
Wed, 06 Feb 2019 12:45:32 +0000https://www.hlregulation.com/?p=11024German Minister of Economics suggests revising EU and German merger control regulations to enable the creation of European champions - and keeps FDI options on the table to prevent acquisitions by non-European players

]]>German Minister of Economics suggests revising EU and German merger control regulations to enable the creation of European champions – and keeps FDI options on the table to prevent acquisitions by non-European players

The German Federal Minister of Economics, Peter Altmaier, published a paper on 5 February 2019 entitled “National Industry Policy 2030” which sets out the “strategical guidelines for a German and European industry policy” (to be accessed here in German). The paper aims to address the economic changes brought about by globalisation, protectionism and disruptive new technologies. It proposes a two-pronged solution to these developments: loosening EU and German merger control rules to benefit European-only mergers while maintaining a tight German Foreign Investment Control regime (the latter having only recently been amended, see here for more information).

In this paper, the Minister outlines the key technical competencies he believes Germany and Europe should better harness in order to keep up with international developments. The Minister expresses concern that, in the absence of such efforts, Germany and Europe will no longer be technological leaders and could forgo the chance to become such leaders in the future. The paper focuses in particular on the following areas of growth: digitalisation, platform economy, AI, autonomous driving, medical diagnostics and automation of production (i.e. the so-called Industry 4.0).

The Minister expresses his belief that a worldwide “renaissance” of strategies of industrial policies has taken place and states that only a few economically successful countries continue to rely solely on the power of the market without implementing such policies. The paper also identifies a rising global risk posed by the strategies of State players which promote fast expansion in order to conquer and monopolise new markets. The paper suggests two regulatory solutions to combat this:

(i) Looser merger control regulations: The Minister recommends creating national and European champions, or as he puts it in the paper: “Size matters!” This approach reflects a controversial political debate in competition law over whether EU merger regulation should be loosened to allow the creation of larger, European players on markets which are deemed to be global. This debate has become all the more topical in light of the European Commission’s veto against the Siemens/Alstom rail merger. The paper proposes that European and German competition law should be reformed to enable German and European companies to grow and better compete at an international level.

At the German level such an instrument already exists today: the so-called Ministerial approval which enables the Minister of Economics to approve mergers for macro-economic reasons if he deems the deal to be strongly in the public interest, even if the German Federal Cartel Office has vetoed the transaction because it significantly impedes efficient competition. Following the European elections this summer, the new European Commission may possibly face strong lobbying efforts from Berlin and Paris calling for the review of the EU Merger Regulation in this area.

(ii) Tighter FDI screening procedures: While the German paper condemns the growing tendencies of protectionism internationally, the Minister leaves open the option of using Foreign Direct Investment Control to prevent acquisitions by non-European players of strategically important German companies. The paper specifically refers to companies in the fields of technology and innovation, and more precisely platforms, AI and autonomous driving. In this respect, the Minister proposes to set up a “national investment facility” for the German State to invest in important companies and prevent their acquisition by non-European players.

The paper also states, somewhat vaguely, that the State should exercise its ability to intervene based on a “new principle of proportionality in political economy”.

The political positioning of the Minister comes as no surprise. As early as last summer, the Federal Government prevented the acquisition by Chinese investors of a 20% share in an electricity transmission operator by instructing the State-owned bank KfW to take over the target. In the aftermath of this transaction, Germany tightened its regulations on Foreign Investment Control (read our previous blog post on this topic here). Another example of the Federal Ministry of Economics intervening in this area was its attempt last year to convince large German companies to work together to set up a local battery cell factory in Germany in order to compete against Asian incumbents in this field. This new paper published by the German Federal Minister of Economics is therefore yet another example of the recent tendency of global and European governments to intervene in national economies. Other examples include the expansion of the CFIUS regime via FIRRMA in the US and the new EU rules for screening foreign direct investment.

Investors and other transaction parties should continue to closely monitor these developments and their effect on the timeline, process and execution of transactions in Germany.

]]>Pharma Companies May Benefit from Proposed Patent Law Changes in China; Public Comment Invitedhttps://www.hlregulation.com/2019/01/09/pharma-may-benefit-proposed-patent-law-changes-china/
Wed, 09 Jan 2019 22:56:21 +0000https://www.hlregulation.com/?p=10981On January 4, China’s National People’s Congress (NPC) released draft amendments to the Chinese Patent Law, proposing expanded and enhanced protections that may provide real benefits to companies that develop new drugs. A potentially important condition to one of the key proposed changes specific to new drugs is that it would be available only for

]]>On January 4, China’s National People’s Congress (NPC) released draft amendments to the Chinese Patent Law, proposing expanded and enhanced protections that may provide real benefits to companies that develop new drugs. A potentially important condition to one of the key proposed changes specific to new drugs is that it would be available only for products that are submitted for marketing approval concurrently in China and other countries. Although clearly intended to motivate companies to prioritize seeking new drug approvals in China, the proposed patent term extension would appear to be limited to products that are first submitted for marketing approval to China and another country, and would not apply to products first filed only in China. As a practical matter, this may limit the usefulness of the provision.

The most significant change that’s targeted to drug products would be the possibility of extending the 20-year term of invention patents for new drugs. As proposed, companies would be able to add up to five years to the patent term to make up for the time spent waiting for approval, when the drug product couldn’t be commercialized. The extended patent term could not go beyond 14 years after the drug’s approval. Pharmaceutical companies would also benefit from proposed enhancements to the available damages for patent infringement: punitive damages of up to 5X actual damages would be available for serious willful infringement, and where actual damages can’t be proven, the maximum damages a court can impose would be increased from 1 million to 5 million RMB Yuan (around $700,000 USD).

These proposed patent law revisions complement ongoing efforts to establish and strengthen incentives to develop new, innovative drug products, consistent with the Opinions on Deepening the Reform of the Examination and Approval System and Encouraging the Innovation of Pharmaceutical and Medical Devices, issued by the General Office of the State Council in October 2017. As discussed in our previous post, for example, the National Medical Products Administration (NMPA, formerly China Food and Drug Administration) last year issued a draft guidance regarding exclusivity for pre-clinical and clinical data submitted to the government. The government is expected to finalize rules on data exclusivity protection for new drugs this year.

The proposed patent law changes could be significant, and the public comment period, which runs through February 3, offers companies an opportunity to voice support and/or suggest revisions to enhance the proposal. If we can help evaluate the likely impact of the proposals, consider possible improvements to suggest, or draft a comment, please let us know by contacting any of the authors of this blog or the Hogan Lovells attorney with whom you regularly work.

]]>With the opportunity for global pharmaceutical companies to gain new access to the Chinese market presenting itself like never before (see our previous blog posts here and here), significant news broke on December 7, 2018, regarding a newly implemented pilot centralized drug procurement program (the “program”) that will have significant ramifications for global pharmaceutical companies. Specifically, China just announced the reduction of prices for certain off-patent generic drugs by up to 96%. Under the program, the government will award a contract to the lowest bidder, who will be guaranteed a sale volume of 60-70% of the total market for a year. The move is aimed at reducing drug prices and encouraging consolidation in the generic drug industry. The program will be a significant change in how generic drugs are priced and procured in China.

The framework of the program was established by the Central Comprehensively Deepening Reforms Commission (CCDRC), a governing agency that is directly lead by the Politburo of the Communist Party of China. The CCDRC has entrusted the Shanghai City Government to implement the program, which covers 11 major cities in China, including Beijing, Tianjin, Shanghai, Chongqing, Shenyang, Dalian, Xiamen, Guangzhou, Shenzhen, Chengdu, and Xi’an. Together, according to a Chinese news source (“21st Century Business Herald”), the combined healthcare markets from these 11 cities constitute about 30% of the total Chinese market. Under the program, pharmaceutical companies had the opportunity to submit bids for 31 generic drugs and the contracts were awarded under the following principles:

When there are three or more bidders, the lowest bidder will automatically be awarded the contract.

When there are two bidders, the lower bidder will be chosen to further negotiate with the procurement office. The drug price discount rate will be negotiated using the average discount rates from other generic drugs as a reference.

When there is just one bidder, the drug price discount rate will be negotiated using the average discount rates from other generic drugs as a reference.

After the bidding, which took place on-site in Shanghai, generic drug manufacturers were awarded contracts for 25 generic drugs with guaranteed sale volume in the 11 major cities in China. The average price dropped 52%, with the highest price reduction being 96%. We have translated the drugs that were awarded contracts under the program in a list below. While many global pharmaceutical companies participated in the bidding process, all but two successful bids came from domestic Chinese drug manufacturers. Additional information on the generic drug manufacturers who had winning bids and the pricing information can be found online at: http://www.smpaa.cn/gjsdcg/files/file5772.pdf.

No.

Drug

Drug Manufacturer

1

Atorvastatin calcium tablets

Beijing Jialin Pharmaceutical

2

Rosuvastatin calcium tablets

Zhejiang Jingxin Pharmaceutical Co. Ltd.

3

Clopidogrel hydrogen sulfate tablets

Shenzhen Salubris Pharmaceuticals

4

Irbesartan tablets

Zhejiang Huahai Pharmaceutical Co., Ltd.

5

Amlodipine besylate tablets

Zhejiang Jingxin Pharmaceutical Co. Ltd.

6

Entecavir dispersible tablets

Chia Tai Tianqing Pharmaceutical Group Co. Ltd

7

Escitalopram oxalate tablets

Kelun Group

8

Paroxetine hydrochloride tablets

Zhejiang Huahai Pharmaceutical Co., Ltd.

9

Olanzapine tablets

Jiangsu Hansoh Pharma

10

Cefuroxime axetil tablets

Chengdu Brilliant Pharmaceutical Co., Ltd

11

Risperidone tablets

Zhejiang Huahai Pharmaceutical Co., Ltd.

12

Gefitinib tablets

AstraZeneca AB (Kagamiishi Plant, Nipro Pharma Corporation)

13

Fusinopril tablets

Sino-American Shanghai Squibb Pharmaceuticals Co., Ltd.

14

Irbesartan hydrochlorothiazide tablets

Zhejiang Huahai Pharmaceutical Co., Ltd.

15

Lisinopril tablets

Zhejiang Huahai Pharmaceutical Co., Ltd.

16

Tenofovir disoproxil fumarate tablets

Chengdu Brilliant Pharmaceutical Co., Ltd

17

Losartan potassium tablets

Zhejiang Huahai Pharmaceutical Co., Ltd.

18

Enalapril maleate tablets

Yangtze River Pharmaceutical Group

19

Levetiracetam tablets

Zhejiang Jingxin Pharmaceutical Co. Ltd.

20

Imatinib mesylate tablets

Jiangsu Hansoh Pharma

21

Montelukast sodium tablets

Anbisheng System

22

Montmorillonite powder

Simcere Pharmaceutical Group

23

Pemetrexed disodium for injection

Sichuan Huiyu Pharmaceutical

24

Flurbiprofen axetil injection

Sichuan Huiyu Pharmaceutical

25

Dexmedetomidine hydrochloride injection

Yangtze River Pharmaceutical Group

It is unclear when this program will be rolled out nationwide and how many generic drugs will eventually be covered. It is important to recognize that under the program, the only determining factor for a successful bid will be the price. Thus, as global pharmaceutical companies look to do business in China, the implementation of this program will undoubtedly impact strategies on how to commercialize drug products in China and how to best compete in a bidding war with a domestic Chinese drug manufacturer.

It is also notable that this program has caused significant impact in the Chinese financial markets. Stocks have reacted negatively thus far. It will be interesting to see whether the concept of “lowest bid wins” affects the public’s view of the quality of their drug products. On the other hand, it is expected the program will facilitate the generic drug industry’s consolidation and push more Chinese pharmaceutical companies towards innovative drug research and development. We will be monitoring the program closely, and particularly looking at whether there are any changes made to the program once rolled out nationwide.

]]>CFIUS Annual Report Highlights Period of Increased Scrutiny for Foreign Investmentshttps://www.hlregulation.com/2017/09/22/cfius-annual-report-highlights-period-of-increased-scrutiny-for-foreign-investments/
Fri, 22 Sep 2017 14:06:38 +0000http://www.hlregulation.com/?p=10030In 2015, the Committee on Foreign Investment in the United States (CFIUS), a U.S. Government interagency committee that conducts national security reviews of foreign investments, maintained a heavy case load, reviewing 143 transactions, according to CFIUS’s recently published annual report to Congress.

]]>In 2015, the Committee on Foreign Investment in the United States (CFIUS), a U.S. Government interagency committee that conducts national security reviews of foreign investments, maintained a heavy case load, reviewing 143 transactions, according to CFIUS’s recently published annual report to Congress. Although the report covers transactions reviewed two years ago, it offers important insights about the Committee’s views on the growing national security risk of foreign investments.

We highlight below certain key features of CFIUS’s annual report:

Continued high volume of cases. CFIUS’s high volume of cases continued in 2015, with the Committee reviewing 143 transactions, only four fewer than in 2014. The next two years’ annual reports – for 2016 and 2017 – will show even higher numbers. In 2017, CFIUS already has accepted more than 170 cases for review.

China remains atop the list of CFIUS filers. For the fourth consecutive year, Chinese investment accounts for the largest percentage of notices filed with CFIUS, rising modestly as a percentage of the total number of notices from approximately 16 percent in 2014 to approximately 20 percent in 2015.

Longer reviews suggest greater overall scrutiny. The number of cases proceeding to a second-stage investigation, which can extend CFIUS’s review from 30 to 75 days, rose from 35 percent in 2014 to 46 percent in 2015. The rise is likely attributable to greater CFIUS scrutiny of foreign investments generally, the complexity of the transactions, including the ownership structures of the buyers and the technologies of the U.S. companies, and CFIUS’s heavy case load. The longer reviews in 2015 cannot be attributed solely to CFIUS’s scrutiny of Chinese investments – a topic that garners significant press attention – because the percentage of Chinese cases in 2015 did not increase substantially over 2014 levels. This trend of longer reviews has continued through 2017, meaning that parties should continue to assume that any CFIUS review might last 75 days.

Transactions abandoned over national security concerns. As in past years’ reports, the 2015 report identifies the number of cases that were withdrawn (13), and, of those, the number that were re-filed (9). This year’s report specifies that three of the withdrawn cases involved transactions that the parties abandoned after (i) CFIUS informed the parties that it was unable to identify mitigation measures that would resolve its national security concerns or (ii) CFIUS proposed mitigation measures that the parties declined to accept. In another withdrawn case, the parties re-filed their notice in 2016 but ultimately withdrew the notice and abandoned the transaction before CFIUS had completed its review, suggesting that national security concerns might have driven the second withdrawal. Similarly, in 2017, several transactions – most involving Chinese investors – have been abandoned based on CFIUS’s national security concerns.

One filing outright rejected. In one 2015 case, CFIUS rejected the parties’ notice because information they had provided in the notice contradicted other information in the U.S. Government’s possession, and the parties ultimately abandoned the transaction. This case highlights the importance of transparency and accuracy in providing information to the Committee and serves as a reminder that CFIUS has multiple sources of information, including the U.S. intelligence community.

Additional mitigation measures identified. The report identifies certain mitigation measures that CFIUS employed in 2015, including ones that had not been identified in previous annual reports, such as security protocols to ensure the integrity of hardware and software sold to the U.S. Government and notifications to customers about the underlying foreign acquisition. Although in many cases CFIUS had imposed these mitigation measures prior to 2015, CFIUS might have chosen to include them in the report because the Committee (i) had begun to use these measures with greater frequency or (ii) wanted to make companies aware that these types of restrictions might be imposed in future cases that raise serious national security concerns.

]]>USTR Requests Input on Impact of Trade Agreements on Government Procurementhttps://www.hlregulation.com/2017/08/24/ustr-requests-input-on-impact-of-trade-agreements-on-government-procurement/
Thu, 24 Aug 2017 18:59:18 +0000http://www.hlregulation.com/?p=9948On August 21, 2017, the Department of Commerce (Commerce) and the Office of the United States Trade Representative (USTR) issued a request for public comment on the impact of government procurement provisions of U.S. trade agreements on U.S. manufacturers and suppliers. Prompted by President Trump’s “Buy American and Hire American” Executive Order (E.O.), the request seeks to understand how domestic preference laws affect participation of U.S. manufacturers and suppliers in the Federal procurement process.

]]>On August 21, 2017, the Department of Commerce (Commerce) and the Office of the United States Trade Representative (USTR) issued a request for public comment on the impact of government procurement provisions of U.S. trade agreements on U.S. manufacturers and suppliers. Prompted by President Trump’s “Buy American and Hire American” Executive Order (E.O.), the request seeks to understand how domestic preference laws affect participation of U.S. manufacturers and suppliers in the Federal procurement process. Noting the significance of reciprocity in the global trading arena, the request also asks for industry input concerning the “costs and benefits” of trade agreements, and related laws, from those U.S. manufacturers and suppliers competing in foreign government procurement markets. Comments are due by September 18, 2017.

Background of the Request for Comment

The President’s Executive Order

Designed to further the Administration’s “America First” agenda, the “Buy American and Hire American” E.O., which we previously analyzed, aims to maximize the Federal government’s use of goods, products, and materials produced in the United States by requiring agencies to increase monitoring, enforcement, and compliance with Buy American Laws[1] while minimizing the use of waivers.

The E.O. mandates that agencies assess Buy American Laws and provide specific recommendations regarding ways to strengthen those laws and develop policies to maximize the use of materials produced in the United States. It also directed the Secretary of Commerce and the USTR to conduct a review of the effects of U.S. Free Trade Agreements (U.S. FTAs) and the World Trade Organization’s Government Procurement Agreement (GPA) on the implementation of domestic procurement preferences.

The Administration’s Memorandum

As part of the E.O.’s initiatives and prior to the USTR’s release of its request for comment, the Office of Management and Budget (OMB), issued a memorandum to Federal agencies entitled, “Assessment and Enforcement of Domestic Preferences in Accordance with Buy American Laws” on June 30, 2017. The memo directs agencies to address three primary areas bearing upon Federal procurement:

Oversight of Buy American Laws: Agencies must assess “the monitoring of, enforcement or, implementation of, and compliance with Buy American Laws.” The memo requires agencies to provide a report addressing 1) any procedures and guidance that the agency has developed “to assist the workforce in meeting the requirements of Buy American Laws and the application of the Trade Agreement Act (TAA)”; 2) any internal reviews conducted in the last two fiscal years regarding compliance with such laws; 3) any marketing and outreach that the agency has taken to promote and enhance visibility for the acquisition workforce of products that are compliant with Buy American Laws; and 4) any training tools or resources that the agency uses to ensure the acquisition workforce understands the parameters and technical mechanics of Buy American Laws and the TAA.

Enforcement of Buy American Laws and Waiver Usage: Agencies are required to analyze the use of waivers within their agencies by type and impact on domestic jobs and manufacturing.

Steps to strengthen implementation of Buy American Laws: Agencies must “develop and propose policies to ensure that, to the extent permitted by law, Federal financial assistance awards and Federal procurement maximize the use of materials produced in the United States, including manufactured products; components of manufactured products; and materials such as steel, iron, aluminum, and cement.” The memo also instructs agencies to address ways to improve current agency practices bearing upon oversight of Buy American Laws.

The Request for Public Comment on the Impact
of Public Procurement Trade Agreements

The request for public comment by Commerce and the USTR addresses one of the E.O.’s mandates by seeking industry input “to better understand how the U.S. government procurement obligations under all U.S. free trade agreements and the GPA affect U.S. manufacturers’ and suppliers’ access to and participation in the domestic government procurement process.” This is a somewhat curious way of formulating the topic, since in general neither Buy American Laws nor trade agreements restrict or regulate whether U.S. manufacturers have access to U.S. procurements. Rather, they govern which foreign-made products have access to the Federal market. Perhaps a better way of summarizing what the request is trying to get at would be, How do trade agreements affect the competition faced by U.S. manufacturers in Federal procurements? And, what are the costs and benefits to the U.S. economy and U.S. taxpayers of such trade provisions?

Acknowledging that “reciprocal access to trading partners’ markets is an important motivation for including government procurement obligations in U.S. free trade agreements and for the United States’ membership in the GPA,” Commerce and the USTR are also seeking comment on how these obligations affect manufacturers and suppliers competing in foreign government procurement markets. Any modifications to current trade agreements lessening foreign access to the Federal market could also lead to reduced procurement of U.S. goods by foreign governments.

The request for comment poses a series of questions on access to U.S. Federal and to foreign government procurement markets for U.S.-manufactured goods. In responding to the questions, commentators are requested to consider the impact with respect to:

Business opportunities that are made available;

Economic incentives that trade agreements and Buy American Laws provide;

How trade agreements impact business competitiveness, or increase or decrease competition, in government procurement opportunities;

How Buy American or similar foreign requirements increase or decrease companies’ (prime contractors’) competitiveness in government procurement opportunities;

Administrative compliance costs tied to Buy American and similar government procurement policies; and

Additional costs relating to providing or otherwise proving the country of origin of goods provided.

Potential Impacts

It will be interesting to review the impact assessments that industry and other interested parties submit in response to the request. Perceived impacts are likely to vary by sector, due to varying coverage and restrictions of Buy American Laws and trade agreements, and due to differing market conditions and supply chains in those sectors.

Pharmaceuticals. The TAA is a major issue for pharmaceutical companies because over 80% of the world’s active pharmaceutical ingredients come from India and China, non-FTA countries. However, recognizing that innovator drugs under patent are available from only one source, the Department of Veterans Affairs recently liberalized its procurement policy with respect to the Federal Supply Schedule (FSS) by requiring such drugs to be offered for FSS contracts even if they have non-FTA country origin. If instead drugs were subject to the Buy American Act (BAA), a price evaluation preference would be applied to non-domestic offers, but that would have no impact if there is no U.S. final manufacturer. In theory there could be some inducement for more U.S. final manufacture, but the Federal market is small relative to the commercial market and might not be enough to affect many product sourcing decisions. The cost of components test would not apply, since drugs are commercial off-the-shelf items.

Information technology (IT) equipment. Congress has removed commercial IT products from coverage of the BAA. Therefore, the effect of the TAA in this field is not to liberalize trade, but to reduce the range of potential sources by making non-FTA countries ineligible. China is the country most affected, as most other major IT manufacturing countries are FTA signatories.

Other commercial items. While the BAA still requires U.S. manufacture for non-IT items, Congress has waived the cost of components test for commercial off the shelf (COTS) items. This is probably the area in which FTAs have had the greatest impact. The GPA and other FTAs open U.S. procurement on an equal basis to manufacturers located in the vast majority of significant U.S. trading partners. However, it is worth noting that the country that first comes to mind for low-cost manufacturing—China—is not one of them. Nevertheless, the economic impact is mitigated because government sales generally make up only a relatively small fraction of total commercial item sales. Therefore, sourcing and supply chain decisions by U.S. as well as non-U.S. companies tend to be driven far more by cost, quality, and reliability than by access to the Federal market. Therefore, it is doubtful whether application of the BAA standard rather than the TAA standard would result in relocation of much manufacturing to the United States. In some cases the BAA price preference would not be enough to enable a BAA product to win bids. Any benefit would have to be balanced against the increased cost to the taxpayer and the fact that the government would lose access to sophisticated technology manufactured in places such as Japan and Germany.

Military equipment. This is an extremely large U.S. export sector. It is little affected by FTAs, because there are national defense carve outs. Instead, this sector is governed by bilateral memoranda of understanding between the U.S. Department of Defense and the defense ministries of allied countries, including all NATO nations and Israel. These provide for reciprocal free trade. Historically the major systems manufacturers and integrators have opposed content restrictions, for multiple reasons. One is that the companies are major exporters and have more to gain than to lose by open government procurement. Another is that major systems are incredibly complex, having hundreds of thousands of components, and tracking component origin can be an administrative nightmare with little countervailing benefit. On the other hand, there may be some U.S. specialty component manufacturers who would prefer to be protected against foreign competition. There are carve-outs for congressionally-imposed preferences for U.S. textiles and clothing, food, specialty metals, and other niche goods. These restrictions are not affected by trade agreements.

Other non-commercial items. This is a relatively small category of goods. Since the cost of components test applies to it, the proportion of products that are eligible is smaller than for commercial items. Conversely, by waiving the BAA, FTAs have a correspondingly larger liberalizing impact for this category of goods. However, even companies that do some or all of their manufacturing in the United States do not necessarily favor Buy American because it limits their ability to source components elsewhere to meet competition.

Steel. A lot of steel goes into state and local highway and transit projects funded in part by Department of Transportation grants. Grant restrictions, including US-melted steel requirements, are carved out of FTAs. Interestingly, some U.S. as well as foreign steel producers are also excluded because raw materials may come from other countries. Thus, these restrictions benefit some U.S. producers and disadvantage others.

Construction material. The BAA regime for construction materials parallels that for supplies. Unmanufactured materials must be produced in the U.S. Manufactured materials must be manufactured in the U.S. Non-COTS manufactured materials are subject to the additional requirement that U.S. components represent at least 50% of total component cost. Nearly all Federal projects are over the applicable FTA monetary thresholds, however, where the TAA makes construction materials from any FTA country acceptable. Application of the BAA could benefit some U.S. makers of building materials, but it could make business more complicated and expensive for general contractors and their customers.

Software. To date, software has been little affected by trade restrictions or trade liberalization. This is attributable in part to the fact that Buy American Laws generally pre-date the software industry and there are no general restrictions specifically targeting software. Customs and Border Protection decisions hold that recording of software onto media is a substantial transformation of the media. Consequently, it is a simple matter to establish compliant origin at the point of recording, regardless of the fact that development work many have occurred in multiple other countries.

Services. FTAs have had little impact with respect to services, for several reasons. First, Buy American Laws generally aim at manufactured goods, certain commodities (e.g., steel, textiles, specialty metals), and infrastructure (especially highways and transit), not services. Therefore, even though procurement FTAs apply to services, there are few potentially waivable limitations in the first place. Second, the rule of origin for services only requires that the service provider be established (have a permanent place of business) in the United States or an FTA country. This is easy to comply with for any company doing international business, so there is little impact on who can compete for service work among FTA countries. Third, many types of services must be provided at the customer site regardless of any trade requirements (e.g., construction, custodial work, landscaping, maintenance). Some others, such as call centers, cloud computing, and software development, lend themselves easily to remote sourcing.

Small businesses. Small business preferences are carved out from U.S. FTAs, so the FTAs have no impact on them. Small business preferences (which benefit only small businesses operating in the United States) are a sore point with U.S. trading partners, but it is uncertain how much impact they actually have on trade. It is questionable how many overseas small businesses have the resources to participate in U.S. government procurements, even if permitted to compete for U.S. small business set-asides. Canadian small businesses, many of which do sell in the U.S. market, are probably most affected.

Conclusion

The request for comment is a step in pursuit of the Administration’s “Hire American-Buy American” agenda. The Administration may find that industry does not universally share the President’s view that the GPA and other FTAs are “bad deals” for U.S. industry and the U.S. economy. Changes to the U.S. FTAs or the GPA may have varying impacts on the different industry sectors. Regardless of any policy preferences or prescriptions that may be offered by commenters, one can hope that responses will contribute to a more evidence-based discussion on the proper approach to future trade agreements or potential revision of current pacts.

For additional information about the request for comment and domestic preference issues, please contact the authors of this posting or the Hogan Lovells attorney with whom you work.

1 The E.O. defines “Buy American Laws” to mean “all statutes, regulations, rules, and Executive Orders relating to Federal procurement or Federal grants including those that refer to “Buy America” or “Buy American” that require, or provide a preference for, the purchase or acquisition of goods, products, or materials produced in the United States, including iron, steel, and manufactured goods.”

]]>Ahead of Maduro Power Play, Trump Administration Sanctions Venezuelan Officialshttps://www.hlregulation.com/2017/07/27/ahead-of-maduro-power-play-trump-administration-sanctions-venezuelan-officials/
Thu, 27 Jul 2017 15:17:09 +0000http://www.hlregulation.com/?p=9849Ahead of a Constituent Assembly that could re-write the Venezuelan Constitution and dissolve state institutions, the U.S. Treasury Department’s Office of Foreign Assets Control has designated 13 current and former Venezuelan government officials.

]]>Ahead of a Constituent Assembly that could re-write the Venezuelan Constitution and dissolve state institutions, the U.S. Treasury Department’s Office of Foreign Assets Control has designated 13 current and former Venezuelan government officials. According to the Treasury announcement, the designations focus on current and former officials of Venezuelan Government agencies “associated with the elections or the undermining of democracy, as well as the government’s rampant violence against opposition protesters and its corruption.” As a result of the actions, all assets of these individuals subject to U.S. jurisdiction are frozen, and U.S. persons are prohibited from dealing with them. The Treasury designations were taken pursuant to Executive Order (E.O.) 13692 of March 2015, which authorizes sanctions against officials of the Government of Venezuela and others undermining democracy there. U.S. Treasury Secretary Mnuchin warned that anyone elected to the National Constituent Assembly could be targeted for designation.

]]>Trump Administration Re-Certifies Iranian Compliance with Nuclear Agreement; Imposes Sanctions on Additional Entities for Other “Malign” Activitieshttps://www.hlregulation.com/2017/07/20/trump-administration-re-certifies-iranian-compliance-with-nuclear-agreement-imposes-sanctions-on-additional-entities-for-other-malign-activities/
Thu, 20 Jul 2017 18:37:18 +0000http://www.hlregulation.com/?p=9844On July 17, the Department of State communicated to Congress that Iran remains in compliance with its obligations under the Joint Comprehensive Plan of Action (JCPOA), the nuclear agreement reached over Iran’s nuclear program by the world’s major powers that went into effect in January 2016.

]]>On July 17, the Department of State communicated to Congress that Iran remains in compliance with its obligations under the Joint Comprehensive Plan of Action (JCPOA), the nuclear agreement reached over Iran’s nuclear program by the world’s major powers that went into effect in January 2016. Under U.S. law, the Administration is required to make this certification—or not—every 90 days, making this the second time that the Trump Administration has issued such a certification to Congress. In conjunction with certifying Iran’s compliance with the JCPOA, the Trump Administration announced that it renewed waivers of certain nuclear-related secondary sanctions necessary to continue the sanctions relief under the nuclear agreement. Secondary sanctions generally are directed toward non-U.S. persons for specified conduct involving Iran that occurs entirely outside of U.S. jurisdiction.

The most recent certification came following intense drama within the Administration, as President Trump reportedly pushed back against the recommendation of his senior national security advisors, who had advised him to approve the certification while continuing to impose sanctions against Iran for activities involving Iran’s ballistic missile program, support for terrorism, and human rights abuses. President Trump acceded to the recommendation. In a statement on July 18, the State Department announced that while it was certifying Iran’s compliance with the JCPOA, the United States “remains deeply concerned about Iran’s malign activities across the Middle East” and was imposing sanctions on certain entities and persons involved in those activities.

Specifically, the Treasury Department’s Office of Foreign Assets Control (OFAC) announced that it had designated 16 entities and individuals for engaging in support of illicit Iranian actors or transnational criminal activity, and the State Department designated two entities for supporting Iran’s ballistic missile program. These actions were taken pursuant to Executive Order (E.O.) 13382, which targets proliferators of weapons of mass destruction and their means of delivery and supporters of such activity, as well as E.O. 13581, which targets transnational criminal organizations.

Going forward, President Trump appears to want more concerted pressure on Iran, but it is not clear what unilateral steps he might be willing to take. The practice of the Obama Administration, carried forward by the Trump Administration, has been to abide by the terms of the JCPOA, which was focused exclusively on Iran’s nuclear program, while imposing sanctions on Iran for other destabilizing behavior. The prospect of the U.S. withdrawing from the JCPOA and reversing the sanctions relief is unpalatable, as Iran could simply resume its nuclear activities. Given the dearth of good policy options, the likeliest scenario is that the Trump Administration will continue to certify Iran’s compliance with the JCPOA, while imposing sanctions for other activities. Meanwhile, Congress is considering its own package of mandatory sanctions, which would largely codify existing authorities already available to the President and that do not implicate the nuclear-related secondary sanctions relief of the JCPOA.

]]>Mnuchin Repeats Call for CFIUS Reform While Stressing National Security Elementhttps://www.hlregulation.com/2017/06/14/mnuchin-repeats-call-for-cfius-reform-while-stressing-national-security-element/
Wed, 14 Jun 2017 22:05:27 +0000http://www.hlregulation.com/?p=9686On June 7, U.S. Treasury Secretary Steven Mnuchin said publicly that Congress should pass legislation to amend the authorizing statute for the Committee on Foreign Investment in the United States (CFIUS), a U.S. Government interagency committee that conducts national security reviews.

]]>On June 7, U.S. Treasury Secretary Steven Mnuchin said publicly that Congress should pass legislation to amend the authorizing statute for the Committee on Foreign Investment in the United States (CFIUS), a U.S. Government interagency committee that conducts national security reviews. Without elaborating on the specific changes he envisions, Mnuchin said that there was a need for “technical changes” to the statute.

This is the latest reference that Mnuchin has made with respect to ongoing discussions between the Trump Administration and Republican lawmakers over changes to the scope of CFIUS reviews. According to a well-informed congressional source, these discussions are collaborative and involve multiple agencies within the federal government. Consistent with the Treasury Secretary’s role as the Chairperson of CFIUS, the Treasury Department has taken the lead on these discussions on behalf of the Administration.

We have previously reported on CFIUS reform efforts during the 115th Congress discussions here, here and here. The discussions are believed to be focused on heightened scrutiny of transactions involving advanced technologies, steel, and transportation, as well as transactions involving bankruptcy scenarios.

Speaking at the U.S.-China Business Council’s annual membership meeting, Mnuchin reportedly said: “As it related to CFIUS, there are some technical issues and some technical changes that we’re working on legislative fixes for. Fundamentally we want to keep CFIUS as a national security review and we want to deal with economic issues separately. We don’t want to confuse those issues.”

This is of a piece with the Treasury Secretary’s other recent public comments. Mnuchin has indicated that he does not want to change the fundamental nature of CFIUS reviews, which, under the existing statute evaluate the national security implications of “covered transactions” that result in control of a U.S. business by a foreign person.

This is significant inasmuch as there is considerable interest from some in Congress to amend the statute in order to impose a commercial or net economic benefits test on CFIUS reviews or to have such reviews explicitly consider food security as a national security issue. Mnuchin recently has eschewed broadening CFIUS’s mandate in these ways, despite Mnuchin’s January 2017 confirmation hearing statement about CFIUS’s role in “protecting American workers” and a Trump transition team draft memorandum reportedly advocating that CFIUS reviews be expanded to consider food security and reciprocity in the treatment of U.S. investments abroad. Thus, based on the Administration’s discussions with Republican lawmakers and Mnuchin’s recent public statements, the Administration appears to favor retaining the core function of CFIUS reviews: national security. Of course, while Congress will pay close attention to Treasury’s views, it is also free to take a more expansive view of “national security” in legislation.

While Mnuchin has emphasized the Administration’s goal of achieving a more balanced bilateral trade relationship with China, Mnuchin’s statements about CFIUS maintaining its focus on national security appear to be aimed at emphasizing that the U.S. Government is not attempting to discourage foreign direct investment. At the same time, it is still possible that “America First” proponents in the White House will ultimately seek to address the trade gap between the U.S. and China through CFIUS by objecting to Chinese investments in the U.S. on national security grounds.

]]>U.S. Treasury Secretary Mnuchin Urges Amending CFIUS Reviewshttps://www.hlregulation.com/2017/05/23/u-s-treasury-secretary-mnuchin-urges-amending-cfius-reviews/
Tue, 23 May 2017 14:36:11 +0000http://www.hlregulation.com/?p=9586On Thursday, May 18, U.S. Treasury Secretary Steven Mnuchin waded further publicly into efforts on Capitol Hill to amend the authorizing statute underlying the Committee on Foreign Investment in the U.S. (CFIUS), a U.S. Government interagency committee that conducts national security reviews. Munchin reportedly told a gathering of business executives at the U.S. Chamber of

]]>On Thursday, May 18, U.S. Treasury Secretary Steven Mnuchin waded further publicly into efforts on Capitol Hill to amend the authorizing statute underlying the Committee on Foreign Investment in the U.S. (CFIUS), a U.S. Government interagency committee that conducts national security reviews. Munchin reportedly told a gathering of business executives at the U.S. Chamber of Commerce: “There are some parts of CFIUS we probably do need to amend,” adding that officials “should be looking at” joint ventures and acquisitions in particular. In congressional testimony earlier this month, Mnuchin also noted that he reviews CFIUS cases on a weekly basis. Consistent with an interview in early May that he gave to Bloomberg, though, he signaled that he did not expect an expansive modification to the CFIUS review process, which is fundamentally driven by national security concerns. Mnuchin reiterated that the focus of the U.S. Government is on “promoting” the “opportunity for foreign direct investment.”

As we have previously noted here and here, lawmakers in both the U.S. House of Representatives and Senate are examining ways to restrict Chinese and other foreign investment in the United States by reforming national security reviews conducted by CFIUS. At this time, the effort most likely to bear fruit appears to be that of Senator John Cornyn (R-TX), the second-ranking Republican in the Senate, and Rep. Rob Pittenger (R-NC), one of the leading voices on CFIUS matters in the House of Representatives. They are drafting CFIUS reform legislation with input from the Trump Administration, which was earlier rumored to be considering taking executive action on tightening CFIUS reviews. It is not clear whether the White House will ultimately pursue an executive order or rely on the significant breadth of the existing CFIUS statute.

The legislation is evolving, but, according to congressional sources, is centered on the following aspects:

Another possible area of focus may be real estate transactions by foreign investors that result in foreign ownership of real estate in proximity to sensitive government facilities, including U.S. military bases. Last week, three leading Senate Democrats—the Ranking Members of the Finance, Homeland Security and Government Affairs, and Banking, Housing, and Urban Affairs Committees—requested that the Government Accountability Office review the approach taken by CFIUS to examine real estate transactions in order to “assess whether and how CFIUS addresses the full range of national security challenges such transactions may pose.” CFIUS has long considered proximity issues in its reviews and has effectively blocked certain transactions that raised national security concerns due to the specific foreign investor and the proximity of the U.S. target to U.S. military installations.

While the breadth of the existing statute clearly allows CFIUS to undertake reviews of transactions in sensitive industries, in the real estate sector, and from countries of concern to policymakers, Congress feels the need to make these points explicit in the law. The backers of the Cornyn-Pittenger legislation see this effort as a modest change to the statute. Indeed, equally significant from their perspective is what is not included in the currently proposed text. For example, they do not anticipate including agricultural transactions, greenfield projects, or net-economic benefit tests as a statutory focus of CFIUS.

Other lawmakers, however, are seeking more scrutiny over transactions involving food and agriculture. The Food Security is National Security Act would (i) give federal agriculture and food officials permanent representation on CFIUS and (ii) amend the statute to allow the Committee to consider agriculture and food-related criteria when reviewing transactions that could result in control of a U.S. business by a foreign person. Under the current statute, the Committee has the discretion to consider the national security impact of foreign investments on U.S. food and agricultural systems, but the proposed legislation would amend the statute to make food and agricultural criteria explicit.

]]>CFIUS Reform Turns to Food Securityhttps://www.hlregulation.com/2017/03/20/cfius-reform-turns-to-food-security/
Mon, 20 Mar 2017 22:01:26 +0000http://www.hlregulation.com/?p=9387Congressional efforts to reform the Committee on Foreign Investment in the United States (CFIUS), a U.S. Government interagency committee that conducts national security reviews, continue apace. This week saw the introduction of bipartisan legislation in the U.S. Senate that would (i) give federal agriculture and food officials permanent representation on CFIUS and (ii) amend the statute to allow the Committee to consider agriculture and food-related criteria when reviewing transactions that could result in control of a U.S. business by a foreign person.

]]>Congressional efforts to reform the Committee on Foreign Investment in the United States (CFIUS), a U.S. Government interagency committee that conducts national security reviews, continue apace. This week saw the introduction of bipartisan legislation in the U.S. Senate that would (i) give federal agriculture and food officials permanent representation on CFIUS and (ii) amend the statute to allow the Committee to consider agriculture and food-related criteria when reviewing transactions that could result in control of a U.S. business by a foreign person. Under the current statute, the Committee has the discretion to consider the national security impact of foreign investments on U.S. food and agricultural systems, but the proposed legislation would amend the statute to make food and agricultural criteria explicit.

According to a press release issued by Senators Chuck Grassley (R-IA), the Chairman of the Judiciary Committee, and Debbie Stabenow (D-MI), the Ranking Member of the Agriculture, Nutrition, and Forestry Committee, the Food Security is National Security Act of 2017 would enlarge the Committee’s permanent members to include the Secretary of Agriculture and the Secretary of Health and Human Services (who oversees the U.S. Food and Drug Administration). The legislation also adds new criteria to the CFIUS review process to ensure that proposed transactions are reviewed specifically for their potential impact on American food and agricultural systems, including availability of, access to, or safety and quality of food. Senator Stabenow said that the bill would “safeguard America’s food security, food safety, biosecurity, and the highly competitive U.S. farm sector as a whole.”

Backed by two of the largest farm organizations, the Food Security is National Security Act should nonetheless be viewed in a broader context. There is bipartisan interest in Congress in restricting foreign investment, particularly from China, into the United States. Simultaneously, the Trump Administration, backed by Members of Congress with constituent concerns, is seeking to promote its “America first” policy of strengthening the American manufacturing sector. As we previously commented, the prospects for statutory changes to CFIUS reviews appear greater now than at any time since the underlying statute was overhauled nearly a decade ago.

Meanwhile, at the urging of Members of Congress, the Government Accountability Office (GAO) is currently examining whether CFIUS statutory and administrative authorities have kept pace with the rapidly evolving national security landscape. Congressman Robert Pittenger (R-NC) has been among the most vocal proponents of expanding the scope of the criteria that the Committee uses in considering whether to approve transactions resulting in foreign control of a U.S. entity on national security grounds. If the GAO finds that the Committee has insufficient authorities with which to examine transactions, it could well bolster the case of reformists.